Gravitas Spark CrowdFunding

Category: Investment

  • Private Portfolios And Future Returns: Part II

    Private Portfolios And Future Returns: Part II

    Well, we promised. This is a follow-up to our last piece on expected returns for a private portfolio. This time we are going to illustrate a variety of portfolio outcomes with some numbers. However, there IS a catch. Humans are not good at forecasting the future so these returns outcomes are just a guide. A bit like a US-NATO promise to Estonia – we might send military forces to fight off an attack from Russia, but then again we might not. The good news for investors (for Estonia not so much) is that history can provide some confidence but no guarantees. History, in this instance, is the long-run return on private assets which we referenced in last week’s article. As a refresher, here is the reference table we used (Source: Pitchbook):

     

    We noted the various categories of assets and concluded that Spark investors would be mostly invested in private equity and venture capital type assets. Then we decided to use 12% as a conservative ‘base case’  annual growth hurdle (IRR) expected of a portfolio with that mix of assets and quantified that growth over 10 years:

     

    “In real terms (and compounding those rates [12%] of return) that equates to an initial investment of €10,000 growing to €31,000 over 10 years. For context, a fund with publicly listed equities would be expected (by financial planners) to generate 7% returns per annum and thus turn €10,000 into €19,600” 

     

    However, many of the Spark investment opportunities are very early-stage (higher risk) so it would be reasonable to expect something in excess of this 12% base case growth/returns scenario. Rather than use another headline number, we thought this article would be an opportunity to build a returns scenario from the bottom up. In other words, we would use illustrative portfolios of 25 investments each and explore three different mixes of outcomes. Our reasoning for using a portfolio of 25 investments is that this approximates to what many of our Private Portfolio (service) investors are currently trying to target/build as a personal portfolio over three years. The other assumptions used across the different illustrative portfolios are as follows:

     

    Total investment cost = €50,000

    Position size = €2,000 equally invested across 25 companies

    EIIS tax rebate rate = 37%* 

    Holding period = 10 years

     

    *The EIIS tax rebate rate is a ‘blend’ of the new standard rate of 35% and the higher rate of 50% applied to pre-operational businesses.

    Now, let’s consider our first portfolio. According to the US Bureau of Labour Statistics, 65% of start-ups go out of business within 10 years. So let’s use that historic 65% failure rate as a future outcome for our first portfolio. In other words, 16 of our 25 portfolio companies will end up being worth zero. With the remaining 9 companies, we are going to assume that 5 of them become unspectacularly profitable and grind out a typical equity return of doubling every ten years(7% per annum). The final 4 companies are expected to be successful exits or ‘wins’ generating returns of between 7x and 15x. The table below illustrates those outcomes with an overall portfolio rate of return (IRR) of just over 13%. This equates to a multiple of 3.4x of the initial investment cost MINUS your EIIS tax rebate.

    Portfolio 1:

     

    The above example shows how important tax is to the initial cost or valuation multiple paid for your investments ie a 50% tax rebate cuts in half the valuation multiple paid. This portfolio generates a respectable 13% return but in the next example we’d like to demonstrate the importance of “winners”. So, in Portfolio 2 we raise the failure rate to 20 companies (80%) and model the impact of two big exits of 20x and 40x. This scenario delivers a superior IRR (vs Portfolio 1) of 15.4% and a multiple of 4.2x your initial cost of investment:

    Portfolio 2:

     

    Clearly, a return of 40x on a single investment would be huge but for ‘unicorn’ followers of companies reaching billion dollar valuation status this is the equivalent of a €25m company growing to €1 billion. Rare, but increasingly possible given the research team at Dealroom estimate 100 ‘unicorns’ have entered the billion dollar club every year since 2018. However, if the mention of unicorns smacks of fantasy territory let’s look at a more ‘diversified’ mix of outcomes in a portfolio. In particular, we want to model a portfolio reflecting some of the themes (including Spark’s risk management process) we touched upon in our first article of this series. Portfolio 3 is a mix of the following themes:

     

    Recovery: Failure of ‘asset lite’ businesses could actually deliver some recovery values due to the data base built, team domain expertise, customer relationship assets etc.

     

    B2B: Almost 70% of Spark investments are business-to-business (B2B) companies in a world where corporate VCs (CVC) are increasingly active eg Google has acquired more than 200 start-ups over the years.

     

    Taxation: Due to higher capital gains (CGT) and income tax (dividend taxation) regimes in Europe and particularly Ireland the ‘hurdle’ or exit/return expected of a young company must be commensurately higher to compensate institutional investors.

     

    Quality:  Start-up funding is, bluntly, more scarce in this part of the world and Spark probably turns down 9 out of every 10 investment opportunities. In theory, we are already investing in the top quality decile of opportunity.

     

    So, in Portfolio 3 the failure rate will be lower than previous examples (60%) and will also not amount to a ZERO return but include a recovery value of 20%. However, as demonstrated above, the key swing factor is the ‘winner’ category of investments. In Portfolio 3 we ‘diversify’ the outcomes of the surviving 10 companies with 6 actual exits. The following table outlines those outcomes across the portfolio:

     

    Portfolio 3:

     

    Clearly, diversification of outcomes and a higher number of more moderate exits does move the returns (IRR) dial. Any investor with a portfolio delivering 14.7% annual returns for an almost 4 X return on initial investment cost should be happy. Of course, these are merely estimates of the future anchored to historic data. We, like all forecasters, will get it wrong. However, it is reasonable to think a portfolio of mainly B2B assets with varying levels of maturity (along the start-up to private equity buy-out spectrum) operating in busy corporate VC activity sectors will achieve some exit success. You’ve read it here many times before… the future is private. But… there’s an additional Spark Private mantra to get to know – the process is portfolio. Private investors should build a sufficient opportunity set by holding multiple investments in a portfolio. As a small aside, this writer’s personal view is that exit valuations in the private asset world will surprise on the upside compared to even the multiples used in the portfolios above. Again, no promises!

    Writer’s Note: The above is just a basis for discussion and exploring the long-run drivers of portfolio returns. I would be more than happy to talk through our investment pipeline and deal-types with anyone interested in building a diversified portfolio of private assets over the next 2-3 years.

     

     

  • What Returns Can Investors Expect In A Private World?

    What Returns Can Investors Expect In A Private World?

    Well, I can’t promise you a future with a beachfront property in “Gaza Lago”. In fact, in the world of investing there are no guaranteed returns. As promised in our recent Private Portfolio Thoughts newsletter, I wanted to address expectations as to what long-run returns a private investor should be looking for in a portfolio of private assets.  First, let’s take a look at ‘industry standard’ expectations based on global historic data compiled by research house, Pitchbook. Of course, these are just averages and no doubt are ‘skewed’ by supra-normal returns for a small number of successful funds in each asset class. However, the table below gives an approximate guide to expectations over various time horizons and types of investment.

     

    The Spark focus is probably towards the top of this table summarising 5-year and 10-year returns for private equity (PE) and early-stage investing through venture capital (VC). However, if we strip out debt and real asset products the double-digit (%) performance picture is pretty similar across the board for private assets. The annual rates of return (IRR) implied by the performance of these private assets (in aggregate) are 13.4% over 5-years and 12.5% over 10-years.

    Let’s be more conservative and suggest that portfolios of private assets after 10 years SHOULD have grown in value at a rate of 12%. In real terms (and compounding those rates of return) that equates to an initial investment of €10,000 growing to €31,000 over 10 years. For context, a fund with publicly listed equities would be expected (by financial planners) to generate 7% returns per annum and thus turn €10,000 into €19,600. Of course, the extra return earned by the private asset portfolios is the compensation required by investors for the higher risk exposure(reduced liquidity, business failure) compared to the shares of large established businesses trading every day. These return numbers (based on history) can be described as “hurdle” rates which investors are expecting to match or beat in order to justify putting their capital at risk over long periods of time. So, let’s apply some hurdles to our world of very young companies (VC) and small businesses (private equity).

    We know that the industry standard in more mature private capital investment strategies is looking to turn €10,000 into something north of €30,000 over 10 years. We might describe this as an expectation to generate 3x your initial investment amount. Arguably, for higher risk investments in our earlier-stage world, investors could expect/demand an even higher return for their portfolios. If investors wanted 4x returns or €40,000 after 10 years that equates to a 15% annual return which is what private equity strategies have achieved(see table). So, that expectation is not unreasonable. But…. how realistic is it in a high risk portfolio of mainly early-stage business failure? We should touch on the key ‘push backs’ we get from investors who are wary of investing in start-up businesses or smaller private equity deals. The following are the most common perceived wisdoms….

     

    “80-90% of start-ups fail”

    “ Exits are more difficult as IPO markets for smaller companies have struggled”

    “I can just buy publicly listed equities and earn similar returns”

     

    There is an element of historic truth to all these statements but I’m going to use the most dangerous words in the investing lexicon by stating “this time it’s different”. First, the history of start-up failure should take into account the characteristics of older vintages of businesses. Let’s think about old economy businesses investing heavily in premises, equipment, overseas expansion facilities, logistics etc. These are, in most cases, “sunk costs” in capital-heavy businesses. Inevitably, if the business gets into trouble these ‘assets’ are not just worthless but can have an actual negative value due to ongoing liabilities/leases, maintenance costs, security, insurance etc. Now, think about many of today’s “asset light” businesses leveraging digital infrastructure and building value through the experience of the founders/team, the data gathered by the business and the development of relationships with clients and partners.

    These businesses don’t have the same level of sunk costs/liabilities (as old economy businesses) which can swamp the value of the operational “franchise”. Instead, the value within a business which might not be meeting growth targets can be recognised by a third party and lead to another form of exit which doesn’t involve liquidation. In the Spark portfolio we have seen a number of businesses acquired by third parties in the same sector in exchange for shares in the acquiring company. These shares clearly have a value and also change the traditional calculations around start-up failure.

    In the world of debt/credit one of the key financial terms/metrics is historic “recovery value”. In main street terms, this is the typical expected percentage of the debt which can be recovered when a business fails in a particular sector. You will see such sector recovery data displayed as a percentage of the debt ie 20 cents, 30 cents in the dollar. So, in the world of start-ups there is normally no debt and the equity in the business is a complete ZERO in the case of struggle or failure. But, now that’s not quite the case. If an acquiring business is offering a share exchange then the “recovery value” could by 20-50% of the original investment. And, the reason for ‘value’ being found in the business is the experience of the acquired team, the database and client relationships. This is happening on a far bigger scale elsewhere.

    Ever heard of the term ‘acqui-hiring”? This refers to a situation in which a company acquires another company primarily for its talented team or employees, rather than its products, technology, or other assets. In an acqui-hire, the acquiring company may not be interested in continuing the acquired company’s business or product, but rather wants to bring the talent into its own organization. Now, here’s another bit of jargon monoxide…. ever heard of CVC? Well, you know what venture capital (VC) does but there’s a subset of the VC ecosystem called Corporate Venture Capital(CVC). This form of VC funding is in reality larger corporations investing in smaller businesses whose franchises/technology could ultimately be relevant and value-creating for the parent company.

    So, you might think Sequoia, Index Ventures, Tiger Global and Andreessen Horowitz are the kings of VC investing. Now, think again. Amazon, Google, Microsoft and Nvidia are hugely active in the VC funding space. As an illustration, Nvidia deployed $1 billion in 50 VC funding rounds in 2024 alone. Furthermore, Google has acquired a whopping 222 start-ups over the years, and in 2023 the “Magnificent 7” tech stocks participated in 208 VC deals. So, the IPO market might not be as start-up friendly as in the past but Big Tech certainly is stepping up to the plate as a new and highly active exit event option.

    Of course, there will always be those investors who believe they can earn approximately similar returns to private asset strategies by choosing a selection of publicly listed companies. Yep, the likes of Domino’s Pizza, Paddy Power, Apple and Nvidia tick those boxes but there’s also an assumption investors will avoid the temptation of selling while on the multi-decade rocket ride. However, the more significant point is about business failure. Think it’s only start-ups?  Sixty years ago the average life-span of a company in the S&P 500 was over 50 years. Today, it’s less than 15 years! By 2027, almost 75% of companies who were quoted in the S&P 500 in 2016 will have disappeared (Source: McKinsey). Not for the first time, I’d suggest it’s worth a read of the excellent The Future is Faster Than You Think to grasp how fast business and technology leadership is changing.

    We can’t forecast the future. However, we should recognise that the world of start-ups today has changed dramatically. As a final illustration, start-up funding was traditionally populated by a majority of consumer-focused businesses – think retail, textiles, manufacturing, food, fashion etc.  The term “B2C” would be used to describe these business-to-consumer companies. Well, that’s changed too. Certainly, for Spark. A whopping 70% of funding deals completed by Spark have been business-to-business (B2B) opportunities. It should also be noted that our vetting process turns away approximately nine in every ten opportunities. Arguably, we are selecting the top decile of quality in the opportunity universe. No doubt we will get it wrong along the way, but this is still a robust risk starting point. And, it’s not the only starting point…

    The purpose of this article is to set the scene for a follow-up piece on how these structural shifts can impact the average private portfolio and future expectations using sample portfolios and outcomes. But always remember…. if I could truly forecast the future, “Gaza Lago” might personally have an entirely different meaning and location.

  • You’re Watching The Wrong Dictator Reality Show..

    You’re Watching The Wrong Dictator Reality Show..

    It deserves an expletive. It’s exhausting. Magic water spigots turned on in Northern California, summary dismissal of Inspectors General watchdogs and sending uninvited military planes into the airspace of your closest Latin American ally. Of course, it could be worse as an ally – you could just be asked over an introductory phone call to give up over 95% of your sovereign territory. Perhaps, there will be a Eurovision-style poll run by Fox News to decide the future of Denmark and Greenland. I can almost see it now… say hello to the voting panel in Belgrade, or Moldova…. or Transnistria. More expletives. But, no. This week we were given a trillion dollar reminder that we are watching the wrong dictator reality show.

    The trillion dollar damage to tech stock valuations inflicted by China’s unveiling of a super-cheap AI large language model, DeepSeek (with similar performance powers to ChatGPT, Gemini etc) was indeed a “wake up call” for US Big Tech according to President Trump. However, at the same time, the geopolitical machinations of China are veering into reality show territory. Thanks to the erosion of truth in the world there’s no need for James Bond-style subterfuge. Instead, it can be as brazen as hell. Chinese ships have been damaging undersea cables around Taiwan in recent months but this week marked the third severing of an undersea cable in three months…. in the Baltic Sea. The fibre-optic cable in the latest incident connected Sweden and Latvia but this time involved a China-owned ship in the sabotage operation. It would seem that Russia, as China’s “mineral colony”, has invited China to assist in infrastructure “grey-zone” conflict. Indeed, China has its own domestic reasons to ratchet up the geopolitical temperatures of distraction.

    The latest economic activity data from China is looking pretty grim. January manufacturing activity actually contracted which won’t put the cheer into the upcoming New Year celebrations for 1.4 billion Chinese. This manufacturing slowdown has surprised many given recent monetary stimulus initiatives by the Beijing regime. However, we can expect further stimulus measures given Chinese government debt/GDP ratios are closer to 60% compared to US and European governments labouring under debt burdens over the 100% mark already. This monetary firepower will have knock-on effects across international markets and global economic growth. But… there is a strategic price to be paid by the rest of the world. And, it’s not just the obvious trade deficits. DeepSeek is more likely to be a temporary shock and, despite the hysterical headlines, the emergence of a better engineered cheaper way to harness computing power is a net benefit to all, including broader equity markets. However, DeepSeek highlights the growing excellence of China across multiple technologies.

    According to a 2024 study by the Australian Strategic policy Institute (ASPI), China now dominates the US in 57 of 64 critical technologies, up from just three in 2007. The US, which led in 60 sectors in 2007, now leads in just seven. Rankings by the ASPI were based on cumulative innovative and high-impact research and patents. ASPI credits President Xi Jinping’s ‘Made in China 2025’ plan for the infusion of “massive direct state funding for R&D in key technology,” stating that existing strategic investments turned into a plan to achieve technological “supremacy”. The areas where China excels include…

     

    • advanced integrated circuit design and fabrication
    • high-specification machining processes
    • advanced aircraft engines
    • drones, swarming and collaborative robots
    • electric batteries
    • photovoltaics
    • advanced radiofrequency communication

     

    Oh, and did we mention nuclear fusion? Of course, you might have missed this if you’d been watching the fantasy Greenland invasion on the other show. In the past week, Chinese scientists broke the nuclear fusion record for sustained plasma at over 100 million degrees by maintaining a mix of electrons and ions in a fluid state for more than 1,000 seconds. As a reminder, nuclear fusion replicates the sun’s energy, offering limitless, carbon-free energy.

    So, if you were a White House strategist you might want to curtail China’s technology advances. And, this is where things have taken a very strange turn. The Trump campaign has made lots of noise about China with tariffs being the chosen commercial weapon to rebalance US trade deficits with the Middle Kingdom. Fast forward to today and tariffs were, instead, the chosen weapon to bully Colombia. But… the US actually has a trade surplus with Colombia. More strange has been the Trump reverse-ferret on TikTok which he’d now like to see continue operating in the US (rather than enforce the ban upheld by the Supreme Court) with a US investor partner like Elon Musk or Larry Ellison. That all make sense? Now, for the really weird stuff.

    Remember when Taiwan was supposed to be protected by its US ally from the increasing threat of China? Well, while we’ve all been distracted on DeepSeek news, there were some fairly seismic developments in US-Taiwan trade relations. Check out this headline about the two ‘allies’….

     

    Trump’s 100% tariff threat on Taiwan chips raises cost, supply chain fears  –  Business Insider

     

    So much for the tough talk on China. Beijing must be thrilled and President Xi will be encouraged to keep up the ‘grey zone’ infrastructure sabotage in the Baltic Sea and Straits of Taiwan. Meanwhile, the new US Defense Secretary , Pete Hegseth, fresh off the Fox & Friends chat sofa, has got to work defending the nation. First priorities….. revoking former chair of the Joint Chiefs of Staff, General Mark Milley’s security detail, removing all portraits of the general in the Pentagon and pursuing his demotion.

    Anyone get the feeling the wrong ‘enemy’ is being pursued…..?

     

  • Still Some Golden Theme Tickets Left…

    Still Some Golden Theme Tickets Left…

    I’m going to save you some time. Forget about calendar-driven commentariat reviews and 2025 forecasts for investment or geopolitical risk. Sorry to be the “Grinch of Guru”, but calendars and structural investment themes have zero correlation. Opinion is cheap and even the betting markets are displaying their patchy predictive powers in recent weeks. Yip, just a 6% chance of the Ba’athist beast, President Assad, being toppled in Syria. About as much chance as a Chinese spy in Buckingham Palace… oh wait. Sadly, Prince Andrew is a multi-year clown car journey in particularly poor company but there’s a lesson there too. Almost all significant investment themes – risks and opportunities – are multi-year stories whose plots twist and turn but keep a very clear direction of travel. So, let’s take a look at some of the major themes we have previously visited and a few more developing ones; all with interesting plot twists.

    Europe Crisis or Opportunity: Nothing good in the headlines…..German government falls, UK in second month of GDP contraction, France on its 4th premiership in a year. But, but here’s a few twists on the negatives. The lists of where Europe lags the US is a long one, from labour productivity, to AI and innovation, to stock market performance. And yet, if you strip out the performance of AI hardware star, Nvidia, from the S&P 500 then Europe’s stock market (MSCI EMU) has actually earned better returns for investors than the US benchmark since the most recent bull market started in October 2022. That suggests there are lots of European companies doing very well despite ‘core’ European economies struggling. Check out also in recent days Spotify becoming only the second European tech company since SAP to crack the $100 billion market cap mark. The headlines do not lie but the narrative on Europe is more nuanced than you think.

    Healthcare: Another structural theme from previous years’ writings, healthcare has actually been a winning area for Europe thanks to the miracle weight-loss drugs, Ozempic and Wegovy. Their Danish owner, Novo Nordisk, became Europe’s most valuable company in 2024. However, we might be about to enter an accelerated era of therapy/drug discovery for all types of medical illness. The clue is in the Nobel Prizes awarded in both Physics and Chemistry in 2024 to pioneers of AI usage in research. Now, for those already struggling with how AI large language models (LLM) work and the warp-speed calculations of the almost-monthly iterations of these technologies, get ready for the ultimate head wrecker. Google has just developed a quantum computing chip, “Willow”, which performed a computation in less than 5 minutes that would have taken today’s fastest computers 10 septillion years to complete. Yeah, that’s 25 zeros which exceeds known timescales in physics and vastly exceeds the age of the universe. Think about that. This chip created by quantum physics “used” time which theoretically can’t exist unless…… there are other parallel universes. Google Quantum AI founder, Hartman Neven, calmly wrote that the stunning performance of this chip indicates that “we live in a multiverse”.  Maybe Willy Wonka wasn’t so wrong to say “Come with me and you’ll be, In a world of pure imagination”.

    Artificial Intelligence (AI): Arguably, the world of AI has moved in a completely different direction. The shift of investment capital away from bits (software) to atoms (hardware) has been spectacular. Another company nobody ever heard of until recently, Broadcom, has become the latest technology hardware company to join the trillion dollar market capitalisation club. The US chip maker is now one of FOUR tech hardware companies in the list of the 10 most valuable companies on the planet. Clearly, investors see AI infrastructure as the early ‘win’ in the AI arms race. However, do NOT ignore software. Interestingly, the Clouded Judgment software newsletter has flagged a 20% expansion in median software valuation multiples since mid-November (from 5.6x to 6.7x revenues). Also, Nvidia has dropped in value by 11% in recent weeks. Yes, rotation from hardware to software and back again will be a feature of the multi-year AI revolution but the venture capital data from CB Insights confirms the direction of AI travel. Global venture capital (VC) deals in AI jumped 24% in Q3 to the highest levels seen since the Q1 2022 peak. In fact, one in every three dollars of VC investments went to AI start-ups.

    Banking and Fintechs: Closer to home, Revolut has just confirmed it has more than 3 million customers in Ireland. A staggering 75% of all Ireland-based adults now use the UK fintech platform for banking and payments. Meanwhile, the US bank sector has rocketed 30% higher this year, Europe is seeing Italian banking M&A deals and the largest asset manager in the world, Blackrock, has embarked on a private asset acquisition frenzy. We have written before that the future is private and I’m wondering are big corporates thinking the same? Sticking with the fintech sector, it was striking in the past week to see the shipping/logistics giant AP Moller lead an €80m investment round for UK fintech, Zopa Bank. In the same week, we note another globally significant name, Walmart, was the lead investor in a $300m round for fintech platform, One. Hmmm….Private banking/fintech, private opportunity.

    Climate & Electrical Vehicles (EV): Apparently, 11 out of 16 EV battery manufacturing projects in Europe have been canned or delayed. Of course, the $15 billion investment in Northvolt was the highest profile casualty in 2024 but there will be other twists and turns in the electrification journey. And, possibly a lesson in long-term planning. China 20 years ago had almost zero car production capacity. Now, it is on track to manufacturing 30 million cars a year and has surpassed Japan as the biggest exporter in the world with 5.17m units sent overseas. In fact, Chinese built EVs now account for 76% of the global EV market. So, if one were to be thinking 20 years ahead again what is most likely to drive investment returns in the transport world? Well, how about not driving. More specifically, self-driving. So, I’m quietly stunned that Google’s Waymo self-driving cars are clocking up 175,000 rides per week compared to 50,000 rides 6 months ago. That’s actually more than 1 million miles of autonomous transport delivered with an almost flawless safety record. I sense 2025 could see self-driving transport go mainstream and, as I write, Waymo have announced they are about to trial robo-taxis in their first non-US city, Tokyo, next year.

    The list of themes above is not exhaustive but they are structural themes measured in decades rather than calendar years. These are the most likely golden tickets to deliver standout returns like Nvidia’s 27,000 % return over the last 10 years. But, as always, we should keep an eye out for reversals of long standing narratives too. Argentina might be the prompt for contrarian thought while on track to deliver the best stock market returns of 2024. Who knew! So here’s two thoughts to chew over for the festive season: i) A European refugee reversal as Syrian and Ukrainian citizens potentially return home in 2025 and ii) A renewed embrace of nuclear power/investment to drive the electrification of the global economy.

    “Oh you should never, never doubt what nobody is sure about”         –   Willy Wonka

     

  • Does Europe Have Whatever It Takes?

    Does Europe Have Whatever It Takes?

    This is tricky. Here goes… I’m going to sound like Boris Johnson for a moment. Relax. No Greg Wallace, Master Chef or “middle-class women of a certain age”. More like the Middle Ages, and a stunning personal discovery this week that, before counterparties sign off a private investment in Germany, a public notary must read every single word out loud. Yip, not a banana-straightener but for a venture capital investor this week that meant “12 hours and counting” for a Series A investment document to be read out loud in front of founders and investors. In person. It sort of feels like Germany has missed out on a few productivity hacks since the Gutenberg printing press arrived in 1439. Meanwhile, European leadership is in disarray as the French government collapses, Germany’s industrial base struggles and the UK paddles alone in its own faeces-filled waters. It is difficult to ignore the “Europe is Donald Ducked” chorus growing louder by the day. And yet, I believe Europe can change course for the better. First, let’s identify a few key problems…

    Actually, why don’t we turn to the man who rescued Europe once before. Back in 2012 Mario Draghi as President of the European Central Bank (ECB) declared that “the ECB is ready to do whatever it takes to preserve the euro”. Remember the “PIIGS” who struggled in the crosshairs of European debt crisis traders for weeks? Well, Portugal, Ireland, Italy, Greece and Spain have more than survived that credit (or credibility) crisis. In fact, this week Greece was able to borrow at cheaper rates than France. Stunning. And perhaps, that should be Europe’s inspiration. Greece was a mess. Not now. However, the same Mario Draghi in his 400 page EU Competitiveness report is telling us Europe is in a mess and that “without action, we will have to either compromise our welfare, our environment or our freedom”.  Draghi sees the following challenges:

     

    1. Productivity: European GDP growth has lagged the US by 0.5% every year since 2000. Interestingly, demographics (population growth) has played its part in that too. How about building that wall? Maybe not.
    2. Innovation: There are no leading technology companies in Europe. Draghi identifies a “middle tech” trap where Europe seems happy to be in “the peloton” rather than lead. Indeed, outside the information and communications technology sector, European productivity growth matches and often beats US competition.
    3. Finance: Draghi bemoans the lack of joined-up thinking and fragmentation in the area of debt financing and regulation. Think about those hoarse notaries and the 1,330 banks servicing Germany. Then know that Canada has just 93 banks.
    4. Security: Draghi deals with a number of distinct challenges in his report but I have lumped them together as almost existential threats: defence(war), climate crisis (decarbonisation) and industrial dependence(China).

     

    There’s a danger these challenges are perceived as nothing new. Arguably, the outbreak of a full scale European war is the only really new challenge of recent years. The other challenges have been slow-moving train wrecks over a decade or more. However, the point to be made is, like our climate crisis, Europe is running out of time. As always, I try to use data to tell a story and here are a few standout numbers which have crossed my desk in recent weeks:

     

    *In the 1950s to 1970s period European investment in innovation equated to 4% of GDP. That percentage is now 0.5%.

     

    *Venture capital investment in Europe is 6 times lower than the US.

     

    *71% of all current funding for AI globally is in the US. Europe accounts for just 14% of global AI investment.

     

    *The performance gap between US and European stock markets this year is over 21%. That’s the biggest performance divergence since 1976. In fact, US stock markets now account for 65% of global stock market capitalisation but with just 26% of global GDP.

     

    *According to Bank of America research, US to European equity valuations have risen to 3.6x in November, an all-time record. This ratio has DOUBLED in 8 years, and is 3 times the historic average.

     

    *The US stock market has outperformed Europe in 12 out of the last 15 years.

     

    *There are more than 270 regulatory bodies involved in digital networks in the EU today.

     

    *The EU has 34 mobile network operators. China has four, and the US three.

     

    If the list above feels a bit “money” oriented there is good reason. If investment, performance, valuations and growth gravitate to one economic region the knock-on effect is significant for competing regions like the EU. Stripe didn’t even bother starting out in Ireland. The Collison brothers went straight to California. It’s not just start-ups. One of Europe’s homegrown fintech stars, Revolut, is about to IPO but co-founder and CEO, Nikolay Storonsky, has said the US will be their public listing home as London “can’t compete”. Not surprisingly, CB Insights are saying 40% of the world’s AI companies (and talent) are located in the US.

    It’s not just a money tale – those stats above about regulators and network fragmentation are massive hurdles to companies competing for investment capital based on growth. You don’t need a notary to grow GDP. However, like Greece and Ireland in the recent past, it is possible to be ‘forced’ into survival strategies which may require pain. As an illustration, the decision of VW to close manufacturing plants in Germany for the first time in 87 years might only be the start of bad news for the 100,000 VW workers striking in protest. Now for some better news, and a bit of European inspiration…

    Europe has proven already it has whatever it takes to win the battle of the skies. In a truly pan-European collaboration project, Airbus has emphatically emerged as the dominant aircraft manufacturer on this planet. Even before Boeing’s troubles, Airbus was racing towards 60% global market share and currently is winning the market for large single-aisle planes on an 80/20 basis. The European champion of the skies has been beating Boeing for 5 consecutive years and has an order backlog of 8,600 planes. This is the inspiration and illustration of European collaboration. Now look to the skies again.

    War is a tragic European fact of life in Ukraine. However, battles for survival can bring innovation. WW2 was the catalyst for Europe to invent radar, penicillin and jet engines. Today, you might consider the 200 Ukrainian companies currently manufacturing Unmanned Aerial Vehicles (UAVs). Yep, drones are the future and Elon Musk has had the temerity to suggest US F-35 jet fighters are “already obsolete”. If Musk is right and “Future wars will be drone wars” then Europe is the epicentre of UAV innovation. Interestingly, Germany’s start-up AI software company, Helsing, has focused on drones and jet-fighters and is now manufacturing its own attack weapons. These drones are armed and don’t need pilots or GPS, it’s all AI. And, Helsing is already valued at $5 billion.

    Our other survival battle is climate. And Europe can lead. One of the key drivers of productivity and valuation divergences over the years has been energy costs. An auto factory or chemical plant in Europe can typically pay $500m to $1 billion more for its power supply…. each year. Electrification is not just the decarbonised future, it is European industrial survival. While Europe might be stuck in a “middle-technology” trap it might be the US and China who remain wedded to cheaper fossil fuel options. Draghi’s analysis envisages Europe spending €3-4 trillion on electrification, or about 25% (!) of EU GDP over the next 10 years.

    Investment/spend is critical to innovation, and Europe right now looks like it is losing out in the energy race. So, we must hope a power crisis breeds innovation opportunity in electrification and perhaps gives Europe a head start over more complacent rivals. In fact, one of my favourite stats this week emerged in the decarbonisation space. A research paper from University of Chicago and Wharton estimates the total carbon burden of US corporates is $87 trillion. That’s 1.3 x the market capitalisation of US companies in 2023, and starkly demonstrates payment for damages caused by greenhouse emissions would bankrupt corporate America.

    Adversity forcing dramatic shifts in industrial policy and investment capital could ultimately be Europe’s saviour. Furthermore, we should look east to see how countries and cultures free themselves from government and regulatory over-reach. Poland is now, per capita, as rich as Japan or Spain. Its military is arguably the strongest in Europe, and its GDP has grown by 3.5x since 1990. Quietly Poland is becoming a tech and innovation hub. And, behind that drive is a STEM graduate pipeline ranked 4th in Europe between 2013 and 2019. That will only accelerate as Microsoft invests $1 billion, Google builds an R&D centre and a talent brain drain now moves into reverse. Inspiring stuff.

    It can be done. However, it might need a further crisis to prompt Europe’s leaders to commit to ‘whatever it takes’ to survive and lift itself out of decades of decline. And… the data and vibes suggest we are close to that moment.

     

     

  • Big Numbers That Can’t Be Missed

    Big Numbers That Can’t Be Missed

    Now, it’s my turn. I get to vote this week. For lots of busy good reasons, I haven’t read a huge amount on our own election but there’s no doubt it is important. However, I’m conscious I’m just one of 4 billion people voting in the current 12 month period. This also prompts another nagging feeling that it is external events over the lifetime of the next government which will define it. From Ukraine, to Utah, to even Mars, our planet is at an inflection point. The ‘world order’ is dangerously shifting as North Korean troops enter a European conflict zone for the first time, and yet, it would be ill-advised to down tools and just wait. There are other themes and trajectories already established and unlikely to change. Simply put, the numbers are now too big. And, we will continue to watch SIX in particular.

    Artificial Intelligence: It is striking to see various commentaries question the real ‘value’ of AI. During the summer, Goldman Sachs estimated that tech companies were about to spend $1 trillion on AI but queried whether they would ever earn a return on this capital expenditure. Fair question, but there’s another point to be made. The ‘winner takes all’ nature of this tech arms race is existential. The poster child of the AI revolution is Nvidia. Yet again, it smashed analyst forecasts this week in its latest quarterly results. My takeaway is that, of course, there will be misallocation of capital in this existential race but tech companies are going to continue to spend to stay in the race. ‘Exhibit A’ must be Nvidia’s own revenues in its data centre chip division. A whopping $30.8 billion revenues generated in the last quarter revealed a growth rate of 112% vs a year ago. Also, for context, this division has increased its quarterly revenue 7-fold since the early quarters of last year. Note, data centres are the battle ground where AI models are tested and trained, and this trend is set to continue.

    Cleantech: European cleantech suffered a blow this week as Northvolt sought Chapter 11 bankruptcy protection from its creditors. It’s a significant blow to Europe’s efforts to decouple from its dependency on China for electrical vehicle (EV) battery materials, chemistry, design and manufacture. Northvolt tried to deliver in all four process functions and received $15 billion of investment backing to do so. This has been a very expensive way to experience execution risk; both Goldman Sachs and VW have written off investments in Northvolt of $1 billion each. However, just like AI, loss is a recurring feature in any new technology area. So, keep an eye on the big numbers. In this instance, the EU is outspending the US with a $125 billion spend in 2023 (vs $86 billion). But….. China is really the cleantech benchmark. The Middle Kingdom spent $390 billion in 2023 across renewables, carbon capture, utilization and storage, hydrogen, batteries and nuclear power.

    Space: Elon Musk’s SpaceX is the most valuable private company on the planet with a recent funding mark indicating a $250 billion valuation, ahead of ByteDance (parent company of TikTok) on $225 billion. At current pace, it is launching its Starlink satellites (via Falcon 5 rockets) every 2.8 days. If you’re just about getting your head around that launch frequency think about Space X’s massive re-usable Starship which completed its 7th test flight last week. Its payload capacity is 150 tonnes and the plan is for Starship to do two launches…. daily. Now, what if the entire tonnage launched into space in history has been just shy of 40,000 tonnes? That means in the very very near future, Starship alone would be capable of repeating the entire payload history of space in just over 4 months. I’m not sure we have grasped the enormity of this feat and the implications for industries like telecommunications, mining, military defence, tourism, manufacturing or even housing (on Mars?).

    Crypto/Blockchain: Bitcoin is on the cusp of breaking the $100,000 mark. However, we need to start thinking about the entire crypto/blockchain ecosystem. Check out MicroStrategy which on the face of it is a loss-making software business but since 2020 has been investing in Bitcoin. If you thought Nvidia was the best performing share price in the world you’d be nearly correct – it has delivered 2660% returns to shareholders in the last 7 years. But….. MicroStrategy has rocketed by 3420%. Its current market value is $117 billion, making it more valuable than Nike, UPS or Starbucks. Of course, MicroStrategy is a leveraged play on Bitcoin but there are other ways to ‘leverage’ the rapid expansion of stablecoins, crypto funds, tokenisation, blockchain etc. The crypto asset ecosystem has just passed the $3 trillion valuation mark which exceeds the asset value of most countries’ stock markets. These numbers, and the opportunities to plug into this investment pool, are too big to miss…or ignore.

    Banks: It would be easy to move on to the ‘next shiny thing’ in the space or crypto universe but the banking sector is worth watching right now. Governments are finally getting good selling prices (even premia) for rescued bank shares as the UK (Nat West), Germany (Commerzbank), Ireland(AIB), Greece (Piraeus Bank), the Netherlands (ABN-AMRO) and Italy (Monte dei Paschi) all reduce sovereign shareholdings or exit altogether. As an aside, and interesting contrast to ‘shiny new things’  Monte dei Paschi began commercially lending 20 years before Christopher Columbus’s trip to America was financed. Anyway, old or not, the bank sector is hotting up. Breaking news over the weekend suggests Italy’s Unicredito will make a €10 billion + bid for rival BPM, and note Unicredito is already circling Germany’s Commerzbank. Also, it is worth noting that the tax/accounting professional services arm of UK wealth player, Evelyn Partners, has just been bought by private equity (Apax) for £700m. That is significantly more than the £500 million price tag suggested by City analysts.

    Technology Rotation: We have written previously about the particularly strong comeback for technology hardware thanks to AI, semiconductors, EVs and iPhones. The world has become very used to these themes powering the “Magnificent Seven” – Microsoft, Apple, Nvidia, Google, Meta, Amazon and Tesla – to all-time-highs but this analysis of last week’s technology price action in the newsletter, Clouded Judgment, caught the eye:

     

    This week saw the rapid acceleration of an interesting trend that started not too long ago – Magnificent 7 underperformance and software outperformance. Might this be the start of a rotation into software and growth (ie more risky assets)? Meta was down 3% over the last week. Amazon was down 7%. Microsoft down 3%. Google down 6%. Nvidia flat. Apple / Tesla were slightly up. QQQ was down 1.5%. Meanwhile, the WCLD index was up 6% over the last week! In addition to that, there were some really big moves in individual names. Snowflake was up >30% on Thursday after reporting earnings on Wednesday, which lifted the rest of the software market. Also just on Thursday Mongo was up 14%, Confluent / Datadog / Cloudflare were each up 7%.

     

    As a reminder, the Magnificent 7 have an aggregate value of $13.5 trillion which is more than the GDPs of India, Germany and Japan combined. The potential risk of an investor rotation OUT of the Magnificent 7 is a multi-trillion dollar consideration, and also can’t be missed.

    Clearly, my vote can’t change any of the big numbers above. However, these are the numbers which are far more likely to define our investing and business futures on this island.

     

  • Banking On A Deal Frenzy

    Banking On A Deal Frenzy

    This hurts a bit. It kills me to potentially reward poor behaviour, but hey, I’m not nominated to be the Attorney General of the United States of America. The financial giants of Wall Street kept their heads down in the lead up to the US election. We didn’t hear too much commentary on the rule of law, inflationary tariffs or accelerating budget deficits. I mean…who needs property rights (law) or a functioning national balance sheet? Possibly, the infamous Leona Hemsley’s “little people” because they pay taxes, aka the price, in time. But, for now, there’s a very clear short-term calculation being made by Wall Street. A Trump administration determined to slash regulation and speed up commercial transactions is a godsend for bankers. Of course, Elon Musk, Tesla and Bitcoin are perceived as the early big ‘winners’ of a transactional incoming President. However, at a broader level the clear winner in the week since election is the enormous financial sector.

    US Financials are the best performing sector in the markets over the last week (+1.5%) while tech, telecoms, healthcare and materials all have actually booked negative returns for investors(Source: Finviz). That big picture split is interesting and highlights the very essence of what financials are about. It’s all about deals. More deals, more commissions, more fees, more revenues, more bonuses. What deals you ask? Let’s start with the biggies like massive M&A deals. In recent years, the broligarchs have been frustrated by FTC Commissioner, Lina Khan, who has blocked more than 30 corporate mergers/acquisitions on grounds of reduced competition. High-profile deals attracting government(FTC) scrutiny included Microsoft/Activision and Kroger/Albertsons. Only this week, the parent companies of luxury brands Coach and Michael Kors abandoned their merger due to FTC competition-based objections. No deal, no fees. Hence, a more lenient transaction-friendly FTC under Trump is expected to increase deal flow. And, not just in M&A.

    How do I put this delicately? Well, if the incoming Attorney General is already under investigation by his House of Representatives colleagues for sex trafficking, let’s just say the whole area of compliance could be significantly relaxed. We can expect more financial products to be launched and faster in a more relaxed regulatory environment. One area already due to increase activity levels is the IPO sector. Interestingly, Sweden’s Klarna has just announced its plans to list publicly (IPO). However, despite its Swedish home, Klarna is going to list in the US, not Europe. Oh, and Klarna is a financial company. It’s also a great comeback story – the buy-now-pay-later (BNPL) platform and its 85 million customers is heading for a $20 billion valuation. That’s a tripling of value since the fintech ‘winter’ of 2022. Note fintech is not the only survivor of the investor ‘winter’ of 2022…

    The cryptocurrency universe has already been perceived as a Trump regulatory relaxation winner. Bitcoin has rocketed to all-time-highs of $93,000 with an individual asset value of $1.7 trillion exceeding that of Facebook/Meta. The wider cryptocurrency ecosystem has achieved a market value of $3.2 trillion but the bigger story is possibly stablecoins (cryptocurrencies backed by liquid financial assets ). Again, I’d highlight ‘transactions’ as the opportunity for financial services platforms. Stablecoins were used in $8.5 trillion of transactions in the second quarter of this year. That’s more than double Visa’s transaction volume of $3.9 trillion. It also provides a pretty good clue as to why Stripe acquired stablecoin platform, Bridge, for $1.1 billion.

    For the avoidance of doubt, more transactions and deals is an overall positive. More exits, more funding, more deals… the circle of start-up life. At Spark we know more deals, exits and IPOs eventually feeds into the smaller regions of financial markets. We also know there’s a hefty €150 billion sitting in Irish bank accounts earning almost zero returns. It’s not just an Irish phenomenon. There is currently a record $7 trillion of cash sitting in US money-market funds. That’s not a huge surprise when one can earn 4-5% interest in these US deposit accounts for relatively minimal risk. However, watch out for lower US interest rates and increased mega deal headlines in the coming months. Then watch that cash move. And, not just in the USA.

    The EU economy is 99% driven by 26 million private small and medium sized businesses (SME) who account for €5.4 trillion of economic activity. The headlines will almost exclusively focus on the impact of a Trump regime on US multinationals, corporation tax, homeshoring etc. Rather like the trading evidence in markets of the past week, probably not much will really change for the “broligarchs” and the big tech multinationals. However, the markets are telling you financial services will enjoy greater deal activity which will feed through the global funding ecosystem. Indeed, right now there’s an all-time-high number of investment campaigns on the Spark platform (8) with interesting additional private asset/deal opportunities in the 2025 pipeline. We’ve written it before; the future is private.

    So, it seems like a good time to launch Spark Private, the personalised service to grow your private asset portfolio. More details on that next week, after you’ve finished gasping at AG Gaetz.

  • Silver Linings For Finishing 2nd Almost Everywhere…

    Silver Linings For Finishing 2nd Almost Everywhere…

    I blame the Irish. Should have seen it coming. Poor immigrants once upon a time, the changed perspectives were there for all to see. A couple of Kellys, a Mulvaney, a Spicer, a McMahon and a McGahn, all key lieutenants in the Trump 1.0 cabinet of 2017, championed Muslim bans, Mexican walls and family separations. I’m being flippant and skipping through a few decades of political evolution here but political integration of immigrant communities is a good thing. Take it as a genuine US presidential election positive. Of course, there will be plenty of Democratic Party navel-gazing and gnashing of teeth in the days and years ahead, but finishing second for the first time in 20 years (last popular vote loss was 2004) will focus minds on the stunning shift of ethnic minority voters to an anti-immigrant Trump ticket.

    Things looked bad for the Harris campaign very early on Tuesday evening. Hispanic-heavy Miami-Dade County in Florida had given Hilary Clinton a 30 point winning margin in 2016. On election day, Trump obliterated that by 40 points to secure a 10 point winning margin. There were other shockers – Star County (Texas and 97% Hispanic), Suffolk County (New York) and my personal favourite, Anson County in North Carolina. Republicans have won this 45% black county only once before since…. 1870. Wowzers. The purpose of this article is not to follow most post-mortem commentary and examine where the Democrat messaging didn’t connect but rather to highlight some potentially positive developments. If anything, the change in the mix of the Republican vote is more interesting. Try the dilution of white voting power.  The ‘dilution’ phrasing might surprise readers’ perceptions of what constitutes the Republican party base vote, but the scores are in:

     

    *Trump won less of the white vote this year (55%) than 2020 or 2016. And…

     

    *Harris (43%) did better with the white vote than Hilary Clinton or Joe Biden.

     

    *Hispanic men voted for Trump 54% vs 44% for Harris.

     

    The always excellent Noah Smith in his newsletter recalled a former Irish Republican, Ronald Reagan, saying that Latinos would eventually become Republicans. The social negatives attached to that shift are for another day but Smith highlights an even more important point for a polarised US society:

     

    “This largely destroys the narrative that non-white immigration will demographically drown White Americans under a tide of imported minority votes….. At some point, Republicans are going to realize this, and hopefully become less anxious about America’s racial future. Hopefully they will also realize that any attempt to make voting harder actually hurts them in the future, because the impact would fall disproportionately on their own base”.

     

    Oooooh Tucker Carlson might not like that narrative challenge to the “Great Replacement Theory”. But, there’s also another positive attached to this stunning shift in voting patterns. Harris lost so emphatically and so early that there was no dispute over electoral process. In fact, Trump improved his vote in 90% of all counties in the USA, and that includes Guam flipping to red. For those who hoped for decency, that feels like finishing 2nd just about everywhere. Many wanted democracy to prevail. It did, but with the anticipation that the “right” side probably had to win for a smooth transition, right? That caveat is for another day’s discussion too.

    Also, while we are on the topic of ‘right’, another stunner for me was that the white evangelical vote was 22% of the total vote and they voted 81-17 for Trump. Other voters who make up the remaining 78% of the electorate voted overwhelmingly for Harris by a 19 point margin (58-39). So, without white evangelicals Harris would have won the election by 20 points!  Let’s hope God is right……

    Meanwhile, for the socially agnostic financial markets, uncertainty is a wealth destroyer, paralyses decisions and kills investment activity. So, not surprisingly, there have been a few financial wins in the early days after the election. We’d highlight the following:

     

    *Banking and asset management stocks like Goldman Sachs, Blackstone, Blackrock, JP Morgan and Apollo all flew up by 10% or more.

     

    *The S&P 500 had its best day in 2 years and best ever post-election bump (+2.5%).

     

    *Elon Musk’s Tesla jumped 15%

     

    *Bitcoin’s price rise by 9% to $75,000.

     

    The Musk win is probably a struggle for some but the EV revolution is climate critical and hopefully keeps Trump tangentially on board with decarbonisation of the economy. Intriguingly, the presence of Musk as chief Trump mascot could bring a slightly contrary positive. There are some, including me, not comfortable with the billionaire “broligarchs” brazenly pushing their own commercial agendas. However, it would be a mistake to conclude that it is only the Republican party engaging billionaire promoters. The Democrats had their own, possibly glitzier line up of billionaires, influencers and celebs. And, the big strategic mistake would be to react to a Jaws-like electoral savaging by suggesting “we need a bigger boat” or better billionaires. That boat has sailed. The positive lesson from this would be to “listen” and start exerting proactive power.

    One of the critical shifts in voting patterns was urban voting. Democrats still won the big cities but the winning margins were embarrassingly small compared to double-digit history. Urban voters in the likes of New Jersey, New York, Chicago, San Francisco and Detroit have witnessed a disgraceful decline in the condition of their cities. And, other urban voters have noticed. Where Democrats have governing power, they need to deliver better city living. Security, mental healthcare, housing, crime and infrastructure are very real challenges experienced, in particular, by the lower middle and working classes. Investment and solutions to these challenges will improve urban lives and win votes.

    Commentators recently described the US voter base as one now split evenly across three cohorts: i) white college-educated, ii) white non-college educated and iii) everybody non-white. Currently, the Republican party is connecting more effectively and adding voters with two of those three. The Democratic Party should be surprised and concerned about the only one with which they are growing/connecting. The good news is that the key driver of political power in today’s America is not ideology or race. The winning factor is DELIVERY, perceived or promised. Clearly, social growth and stability are important for a nation but there’s a price for everything. In this instance, the price (inflation) – and a perception of social agenda prioritisation – was too high. Just ask Latinos, now known as “Latinx” in Democratic Party literature.

    For investors, less financial regulation, lower technology oversight(AI) and more deals (M&A, IPOs) all promise more exits and further investment cycles. All good news, until it’s not. Note, only 15 years ago the world paid a shattering economic price for deregulation of financial credit markets. Go back another two decades, and here’s a final thought for the autocracy delivery (over democracy) fans out there celebrating technology and commercial freedom…….

    The last global authoritarian empire to implode was tipped into collapse by lies and a catastrophic failure of technology .

     

    “Every lie we tell incurs a debt to the truth. Sooner or later, that debt is paid”

     

    – Valery Legasov, chief of the Chernobyl disaster investigative commission.

  • Is The World Going Full Oligarch?

    Is The World Going Full Oligarch?

    The lettuces won’t be happy. It looks like the UK’s new Chancellor of The Exchequer, Rachel Reeves, and her Autumn Budget 2024 will survive a relatively benign financial market reaction. So far, government debt (Gilts) markets are stable and the domestic-focused FTSE 250 stock index has bounced slightly. Liz Truss will shake her head in delusion but the more understanding reality of today’s world is that the government of the world’s 5th biggest economy was brought down by international asset traders back in October 2022. It probably won’t be the last sovereign state to lose power to commercial interests and yes, money. Simply put, at exactly the wrong moment in time, many of the world’s governments’ ATM spending cards are about to be declined. Check out the following recent headlines:

     

    Interest payments on the national debt (US) top $1 trillion as deficit swells  –   CNBC

     

    IMF warns Japan of debt deterioration in the event of future shock   –   The Japan Times

     

    Why France’s fiscal freak out matters to the world  – Axios

     

    China’s Fiscal Package Aims To Ease Debt Woes, Property Crisis   –  Asia Financial

     

    There’s never a good time for fiscal capacity to be tight. But… literally the planet’s survival is at stake. The climate crisis is everyone’s crisis but governments are expected to lead. Indeed, according to the IEA, governments globally in 2023 spent $1.3 trillion or 1.2% of global GDP on clean energy investment. That bill will surely rise but there’s a big question mark over how the clean energy transition will be funded by stretched governments running record deficits and the highest debt burdens in history. For a clue to that question, let’s take a look at another spending race.

    This race depending on your perspective also has an existential angle. The race, of course, is AI and Packy McCormack’s excellent piece in his Not Boring newsletter has identified a shift in commercial goal – “companies are spending for capability as opposed to straightforward ROI”. Why the ditching of seeking returns on investment? Apparently, the first company to create the AI “Digital God” boils down to an existential pursuit. Loser companies die. Indeed, Larry Page of Google fame has reportedly said many times internally…..

     

    “I am willing to go bankrupt rather than lose this race”

     

    That feels like extremely high stakes thinking. It might explain another development in the world’s most advanced technology economy. It’s one thing for a government to depend on a private company, SpaceX, to conduct an international space rescue mission. But, it’s quite another to see SpaceX’s owner Elon Musk in the words of VP hopeful, Tim Walz, “skipping like a dipshit” at various Trump rallies. Musk may cause me involuntary eye-rolls every time I read him on X or see him on TV but he’s a super-successful builder of future technologies. In fact, he has feet in both existential races with Tesla (climate) and xAI (AI) which is about to raise funds at a $40 billion valuation. If the latter doesn’t feel like an existential race, maybe the monies will convince you. In 2023, just 4 companies – Facebook, Amazon, Google and Microsoft – spent $196 billion or 0.72% of US GDP on AI research and infrastructure. Remember, these companies are really only ‘getting ready’. Furthermore, they are arguably investing at levels which historically would have only been within the compass of sovereign governments.

    I remember reading first about social media companies becoming effectively supra-sovereign powers. At the time, Facebook had 2.5 billion people on its platform, multiples of any other country populations on the planet. Now social media steers business and moves elections, but tech money might be about to go one step further. Forget about tech companies currently rolling out nuclear power for their hyper-scaling data centres. What about a seat in government?  Well, Elon Musk is on the cusp of entering a Trump ministerial cabinet with a role brief focused on cost cutting. I will give you a clue; plenty of those cuts will be in the regulatory, business and tech governance areas. Musk is not alone. Racist rallies in Madison Square Garden or not, big business is keen to put on the Orange war paint for Trump chaos and……… commercial insurance or favour. Check out the latest Trump luvvies from the world of business:

     

    Winklevoss Twins donate $1m each to Trump as champion of cryptocurrency  – The Guardian

     

    Steve Schwarzmann says Trump would be “efficient and effective” president this time – Business Insider

     

    Silicon Valley’s Andreesson Horowitz give Millions to Trump  – Bloomberg

     

    Billionaire Ken Griffin says “expectation today is that Donald Trump will win the White House” –  Fortune

     

    Washington Post flooded by cancellations after Bezos non-endorsement decision  –  NPR

     

    Ooooohh what would Washington Post legends Katherine Graham or Ben Bradlee think in this “Fat Nixon” era? It would appear big tech and big money “broligarchs” see Trump support as commercial insurance at the very least, and possibly a route to unfettered, compliance-light opportunity. One could become dispirited about the overt involvement of big business in politics. But, in reality business was always there in the Washington background. However, it’s not just a US phenomenon.

    Europe has had its share of big business influence on policy. In the UK, they have had trade and Brexit. In Germany, it was the powerful industrial sector and its push for cheap(then) dependency on Russian energy. We will say no more on either policy disaster, except there might be an intellectual reason why US business leaders are in a different universe of wealth creation compared to their strategically inept European counterparts.

    On a final more serious note, perhaps the difference this time is that governments really do need the balance sheets, cash and spending power of big tech. Just six US technology companies – Apple, Amazon, Google, Meta, Microsoft and Nvidia – have a combined market value of $15 trillion. For context, that $15 trillion equates to the  GDP of China as recently as 2020. In this writer’s reluctant view, politicians have two options – tax these guys or become partners. It might seem distasteful but public-private partnership is now an existential fact of life….or death.

    Gotta dip with the dipshits.

     

  • Four Huge Trends For Your Private Portfolio

    Four Huge Trends For Your Private Portfolio

    I scared a few people last week. Apologies. Then again, you could be a public servant or journalist in the US today and be referred to as “the enemy within” by the bookie’s favourite for the Oval Office. Or, how about being a lifetime Tory party member faced with the extremist choice of “KemiKaze” Badenoch or “Honest Bob” Jenrick as your next leader? Better still, put yourself in the shoes of the Tory tactical masterminds who ‘traded’ leadership votes and eliminated their own likely winning candidate, Jimmy “Dimly” Cleverly. Breathe, just breathe slowly. We can’t promise an end any time soon to populist buffoonery but in the real world big changes are afoot. Four developments, in particular, caught the eye this week and highlighted future opportunities for those building new businesses or investment portfolios.

     

    Electricity: If $150 billion of hurricane damage in Florida doesn’t focus climate crisis minds I’m not sure what will. Indeed, there is an encouraging reality check beginning to filter into financial discussions. Just this week the Washington Post ran a story about the cost of extreme weather exerting further strain on an already challenged Federal government’s fiscal position($35 trillion debt). Of course, moving away from fossil fuels to electricity is already set to be the greatest financial shift ever experienced by the global economy – $275 trillion to be invested in the transition by 2050(Source: McKinsey). So, the following statistics really hit home. They are sourced from the International Energy Agency (IEA) and flag the recent growth of electricity use being twice as fast as the growth of energy demand. However, the future is about to turbo charge that relationship. Between now and 2035 electricity usage will outpace energy demand growth by a factor of 6x. Yep, that’s electric vehicles (EVs), AI chips, data centres all doing their future thing. Another way of looking at this shift is that this 6x electricity acceleration equates to the entire energy demands of Japan (4th biggest GDP in world) being added EACH year to global electricity usage.

     

    Banking: In the old days it was banks that provided loans, or credit. Now, every second ‘growth’ headline in investment markets is referencing “private credit”. So, what is it? It is quite simply lending by private pools of capital(not banks), usually sitting within large investment firms. The original “Barbarians at the Gate” were private equity firms who used debt to buy out big companies. Today you might read about Blackstone buying software Smartsheet for $8 bilion. Back in 1988 it was KKR buying RJR Nabisco for $25 billion. Historically, the debt part of the ‘leveraged’ buy-out came from banks. Now the Barbarians (private equity) want to do the banking (debt) too. In the last 12 months there have been 14 different partnerships announced between banks and private credit(debt) firms. Most recently, Citibank announced a partnership with private equity/credit giant, Apollo Global. Amazingly, this relationship turns banking orthodoxy on its head – Citibank’s investment bank will source the deals and Apollo will provide the money/debt. Bankers turned deal makers, deal makers turned bankers. Wowzers. Note, if the Barbarians are now keen to provide debt funding to companies, then they must see opportunity and excellent returns. Current estimates of the size of the market indicate private lending assets (AUM) currently at $1.5 trillion growing to $2.7 trillion by 2027 (Source: Prequin).

     

    Life Sciences: Despite the anti-elite denial of science prevalent in the social media and political spheres, the incredible speed-to-discovery of vaccines seen during Covid-19 is set to continue. However, with a little AI twist. Arguably, AI won its first Nobel Prize in recent days. From The Japan Times….

     

    “The recent awarding of the Nobel Prize in chemistry is an incredible vote of confidence in the potential for artificial intelligence to transform the way medicines are invented by using AI to illuminate and manipulate proteins, life’s most basic building blocks. The Royal Swedish Academy of Sciences honoured University of Washington professor David Baker and two scientists from Google DeepMind, CEO Demis Hassabis and senior research scientist John Jumper.”

     

    Yep, AI machine-learning cracked the code to predicting protein structures with Google scientists right in the middle of it all. Meanwhile the Nobel Prize for Physics went to the “Godfathers of AI”, Geoffrey Hinton and John Hopfield, who developed the tools which power the neural networks underpinning today’s AI boom. Now, think about the Nobel tradition of rewarding decades of research and recognition. Then think about chemistry protein discovery work barely 2 years old and not one, but two, Nobel prizes. Simply astonishing.

    Nuclear Power: It’s not just gold hitting all-time highs. Uranium mining stocks are flying too. Let’s face it, the news flow in nuclear power has been hard to miss. Japan has just re-started a 47 year old nuclear reactor at the Takahama nuclear power station. Amazon is pumping $500 million into nuclear capabilities, and Google has entered an interesting deal with Califormia start-up, Kairos Power. Google has committed to buying nuclear power generated by multiple small modular reactors(SMRs) built by Kairos. And, one for the nuclear history buffs – the infamous Three Mile Island nuclear power station will be restarted in a $1.6 billion deal struck between Microsoft and the energy utility, Constellation. Again, AI is the power demand trigger for these moves. And, mining stocks sitting on uranium reserves might just be the wrong price (low) if a Big Tech AI race goes nuclear on many levels.

    So, there’s four thoughts or trends which are very much part of our future. You might spot AI as the common factor across a lot of these developments but that’s possibly not the only private opportunity. There seems to be some enormous shifts happening in traditional sectors like infrastructure, materials, banking, power and chemistry. The good news is that there are lots of private companies plugged into these transition sectors right now and many will need funding (debt or equity) in the years to come. If that sounds like a private portfolio-building strategy then you’d be right. It’s time to take a private dip. Even better, we might be able to help you very soon…..